New York Securities Lawyer BlogEarlier this week, the Financial Industry Regulatory Authority Inc. (“FINRA”) ordered David Lerner Associates Inc. (“David Lerner”), a Long Island based broker-dealer whose business was largely based on the sale of municipal bonds and Real Estate Investment Trusts (“REITs”), to pay over $12 million in restitution to customers who purchased Apple REIT 10, as well as $2.3 million in fines for charging unfair prices. According to FINRA spokeswomen, Michelle Ong, this is the largest restitution payment for REIT investors. See October 2012 Press Release here. In May 2011, FINRA filed a complaint against David Lerner alleging that the firm solicited thousands of customers and sold the illiquid Apple REIT 10, a non-traded $2 billion REIT, without first performing adequate due diligence to determine whether the investment would be suitable. See May 2011 Press Release here. David Lerner allegedly recommended and sold more than $442 million Apple REIT 10 products by targeting unsophisticated and elderly investors through the use of misleading marketing materials and performance results. Id. David Lerner, the firm’s founder and chief executive officer, was fined $250,000 and was suspended from the securities industry for one (1) year, as well as from acting as the firm’s principal for two (2) years after the completion of his industry. Lerner was also fined $250,000. Additionally, William Mason, David Lerner’s head trader, was fined $200,000 and has been suspended for six (6) months from practice in the industry for his role in the condemned practices. See Broker CRD here. It was also noted in this statement that David Lerner neither admitted nor denied the charges around the sale of the products but, rather, consented to the entry of FINRA’s findings. If you have suffered losses from investments with David Lerner Associates Inc., or any other investment adviser firm or brokerage firm, and believe that you are a victim of sales practice abuses, please contact Lax & Neville LLP for a consultation at (212) 696-1999. Our firm has extensive experience and knowledge representing victims of investment fraud nationwide.
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The SEC’s Efforts Regarding Imposing A Universal Fiduciary Duty Standard Is Suspended Pending Implementation of Dodd-Frank Mandates
Approximately two (2) years ago, after the passing of the Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010 (“Dodd-Frank”), the Securities and Exchange Commission (“SEC”) submitted a report to Congress regarding the issuance of an SEC regulation that would apply a universal fiduciary duty standard to all financial service professionals who provide investment advice, including investment advisers and brokers. Currently, the regulatory standards under the Investment Advisor Act of 1940 impose different standards of investor protection upon traditional stockbrokers and registered investment advisors (“RIAs”). RIAs are held to a strict “fiduciary” duty standard, which requires advisors to place the interests of the client first and make recommendations regardless of the amount of compensation that he or she may receive as a result of their recommendation. Traditional stockbrokers, on the other hand, are held to a less stringent “suitability” standard that merely requires stockbrokers to recommend investment products that he or she deems suitable and consistent with the interests of the particular client at the time of purchase. In an effort to impose a universal fiduciary duty standard on financial services professionals, in January 2011, the SEC recommended to Congress that “anyone providing personalized retail investment advice should operate under a more stringent fiduciary standard”. See SEC Report here. These efforts by the SEC, however, are taking a back seat to implementing recently passed Dodd-Frank mandates. Although the enactment of Dodd-Frank evidenced legislative strides by Congress towards a heightened level of investor protection, its passing seems to be creating a road block for the SEC in passing a universal fiduciary duty standard regulation. SEC Chairman, Mary Schapiro, still asserts that the universal fiduciary duty standard is a top priority, it will none-the-less be taking a back seat to numerous other Dodd-Frank directives. See Investment News Article here. Reportedly, once these other Dodd-Frank mandates are fulfilled, the SEC will conduct cost-benefit and data analyses, as requested by several congressional members. The results of these analyses will then be used to amend the proposed rules the SEC ultimately presents to Congress. These efforts will could take several years. Lax & Neville LLP effectively represents investors, on a regional and national level, that may have suffered losses as a result of their registered investment advisors or broker dealer’s breaches of fiduciary duties, unsuitable investments and/or disregard for their investment objectives. Please contact our team of securities fraud attorneys for a consultation at (212) 696-1999.
A District Court Ordered JP Morgan To Pay Client Over $18 Million For Recommending Unsuitable Investments and Breaching Its Fiduciary Duty
Recently, on October 9, 2012, Judge Linda Morrissey of the District Court for the District of Tulsa County, Oklahoma ordered JP Moran Chase & Co. (“JP Morgan”) to pay over $18 million to its client, a trust, based upon its recommendation of an unsuitable security which ultimately economically benefited JP Morgan. The Court concluded that the bank engaged in misconduct and breached its duty of care when it recommended that the trust purchase variable prepaid forward contracts. Typically, investors who purchase variable prepaid forward contracts agree to give a set number of shares to the broker-dealer on a predetermined future date. The investor receives a high percentage of the value of the shares, as well as a portion of the gains, at the time of the transfer. If the shares incur a loss, the broker dealer absorbs it. This investment provides significant tax advantages for investors and protects the investor from losses, however, simultaneously generates magnanimous investment fees for the broker dealer.
Five Former Madoff Employees Set to Face Trial in October 2013
On Tuesday, October 2, 2012, several former employees of Bernard L. Madoff Investment Services LLC (“BLMIS”) pleaded not guilty to a thirty-three (33) count indictment. The group of former employees who pleaded not guilty on October 2nd included Daniel Bonventre, a former back office employee, Annette Bongiorno, BLMIS’s former supervisor and account manager, Joann “Jodi” Crupi, and Jerome O’Hara and George Perez, two (2) former BLMIS computer programmers. Originally, the US Attorney charged the five (5) former employees with seventeen (17) criminal counts in November 2010, and recently added counts of conspiracy, securities fraud and tax evasion for a total of thirty-three (33) counts. Although defense attorneys stated that they will be filing motions to dismiss based upon the newly alleged criminal counts, the case is expected to proceed to trial in October 2013 and will center around the former employees’ alleged role in the BLMIS Ponzi scheme. Indeed, the jury selection is set to begin on October 7, 2013 and the presiding Judge will reserve approximately three and one half months to hear the trial. Based upon the trial schedule, it is likely that the criminal trial of these former BLMIS employees will conclude on the 5 year anniversary of Bernard Madoff’s guilty plea in December 2008. The trial will take place in the District Court for the Southern District of New York before the honorable Laura Taylor Swain. To date, eight (8) people, including Bernard Madoff, have pleaded guilty to the government’s criminal charges. Lax & Neville LLP represents numerous Madoff victims in SIPC Claims and clawback litigation. If you are a defendant in a Madoff clawback litigation, feel free to contact the firm for a free consultation.
Deutsche Bank to Assess Employee Pay and Bonuses in an Attempt to Boost Profitability
Recently, Deutsche Bank reviewed its current pay practices, particularly those regarding executive bonus compensation, in order to bolster profitability and decrease its overall costs by $5.8 billion. After a 100-day evaluation conducted by the firm’s new co-chief executive officers, Juergen Fitschen and Anshu Jain, Deutsche Bank is expected to implement changes to its expense management measures. In a statement released on September 11, 2012, Deutsche Bank confirmed that it hopes to revamp its financial plan in which it noted, amongst other schematic changes, its intent to transform its current compensation practices. See the Deutsche Bank 9/11/12 Statement here. Deutsche Bank stated that, in the event of a reduction in profit or an instance of transgression, employee bonuses will be suspended. This policy will apply to chief executives and will amend the current payment schedule for deferred bonus payouts from part-payment throughout the span of three (3) years to payment after five (5) years. There has been a great deal of industry and media attention surrounding this anticipated announcement, since it is a primary concern for the entire investment banking industry and regulators. Indeed, several European banks are being scrutinized by investors, politicians and regulators, most of whom believe that employee accountability for actions resulting in lost profits should be more closely linked to their yearly bonuses. This type of bonus policy was first introduced by UBS Financial Services, Inc. (“UBS”) in 2008 after it announced its decision to “clawback” employee bonuses. Such “clawback” provisions allow for the employer to either reduce or fully eliminate the deferred parts of bonuses that have not yet been paid out to employees. A recent example of this growing practice is espoused in JPMorgan’s July 2012 announcement that it intends to “clawback” executive bonuses from executives involved in a $5.8 billion loss originating in its London office and related to the London “Whale” blunder. At Lax & Neville LLP, we represent individuals, securities industry employees and securities industry companies seeking representation in employment matters and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.
Growth In Number of Whistleblower Tips
In response to the mandates imparted by the Dodd-Frank Act of 2010 (the “Act”), the Internal Revenue Service (“IRS”), the Commodity Futures Trading Commission (“CFTC”) and the Securities Exchange Commission (“SEC”) (collectively referred to as “the Agencies”) have implemented agency specific whistleblowing programs. Under the Act, the Agencies are tasked with the oversight and administration of a mandatory reporting regime for tipsters to refer to when reporting potential securities law violations. The success of each agency’s respective whistle-blowing program in increasing as evidenced by the number of awards and tips received and reported to each agency. Since the creation of the Office of the Whistleblower last year by the SEC, it has reported the receipt of more than 2,700 tips of securities law violations. The SEC has also reported the issuance of its first award in the amount of $50,000 that resulted from a tip received about a multimillion-dollar fraud. In this case, the SEC opted for the maximum percentage payout to the tipster allowed under the law – thirty percent (30%) of the $150,000 it has collected to date in the case. While the actual amount of each award is deferred to the agency for determination, the Act requires that the award be at least 10 percent (10%), and no more than 30 percent (30%), of the sum amount recovered by the agency as a result of the tip. There are a number of discretionary factors that are generally considered by the agency in making an award determination, namely: (1) the significance of the information provided to the success of an enforcement action; (2) the relevancy of the information to the agency’s programmatic interest; and (3) whether an award will increase the agency’s ability to enforce the federal securities laws and encourage the submission of high-quality information from whistleblowers. Despite the evident success of the Act’s whistle-blowing program, there has been a growing industry-wide debate with regard to whistleblower eligibility. Under the IRS’s whistleblower statute, a distinction is drawn between a whistleblower who acted as a participant in the activity at issue, and is therefore eligible to receive an award award, and the coordinator of such activity, who is not. See 26 U.S.C. § 7623(b)(3). This distinction gives even more rise to the necessity of a potential whistleblower’s legal advisement in the area of securities law enforcement. At Lax & Neville LLP, we represent individuals, securities industry employees and securities industry companies seeking representation in employment matters and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.
U.S. District Court Confirms $10.2 Million FINRA Award Against Merrill Lynch in a Deferred Compensation Dispute
Earlier today, the United States District Court for the Southern District of Florida (“District Court”) denied Bank of America Merrill Lynch’s (“Merrill Lynch”) petition to vacate a Financial Industry Regulatory Authority, Inc. (“FINRA”) arbitration panel award. See Order Denying Petition to Vacate Arbitration Award, Merrill Lynch, Pierce, Fenner & Smith, Inc., vs. Smolchek, et. al., No. 12 Civ. 80355 (S.D.Fla. Sept. 17, 2012). Merrill Lynch had publicly stated it was confident that this arbitration award would be vacated. This is a significant decision and could affect thousands of Merrill Lynch advisors who either left Merrill Lynch recently or who are thinking about leaving in the future. As a result of the District Court’s decision, Merrill Lynch will be required to pay $10.2 million to two former financial advisors, both of whom were denied deferred compensation. Similar to many other brokers who left Merrill Lynch after its merger agreement with Bank of America in September 2008, Meri Ramazio and Tamara Smolchek (“Claimants”) brought an arbitration claim against Merrill Lynch seeking disbursement of their duly owed deferred compensation. Claimants’ request for damages was based on the theory that the acquisition of Merrill Lynch constituted a “good reason” for collecting their deferred pay. The $10.2 million FINRA arbitration award rendered by the panel in April 2012 included a commensurate total of $5,150,000 in compensatory damages for a breach of contract related to the brokers’ deferred compensation awards and unpaid wage, as well as a sum total of $5,000,000 in punitive damages on the basis that Merrill Lynch has “intentionally, willfully and deliberately engaged in a systematic and systemic fraudulent scheme to deprive Claimants of their rights and benefits under [Merrill Lynch’s] Deferred Compensation Programs.” See Tamara Smolchek and Meri Ramazio v. Merrill Lynch, Pierce, Fenner & Smith, Inc., FINRA Case No. 10-04432. After the award was rendered in April, both parties filed competing petitions seeking to confirm and vacate the arbitration award. Merrill Lynch asserted that: (1) the chairwomen’s failure to disclose certain facts suggested the possibility of a bias and created an evident partiality; (2) the panel’s decision to limit Merrill Lynch’s presentation of its case and to impose certain sanctions against it is demonstrative of the panel’s misconduct; and (3) the panel exceeded its powers. In its order denying Merrill Lynch’s petition to vacate the arbitration award, the District Court concluded that Merrill Lynch “has not sufficiently demonstrated evident partiality on the part of the panel or that the panel engaged in misconduct or exceeded its powers.” In addition to the class action brought by nearly 1,400 aggrieved brokers, which was recently purported to settle for $40 million and is currently awaiting approval from a federal court judge in Manhattan, Merrill Lynch also faces more than 1,000 similar claims in the FINRA arbitration forum. See Scott Chambers et al v. Merrill Lynch & Co., Inc., et al, No. 10 Civ. 7109 (S.D.N.Y). If you are a financial advisor who has any issues related to your employment at Merrill Lynch, or if you are thinking of changing your employment, please contact Lax & Neville LLP at (212) 696-1999 to discuss your potential matter. At Lax & Neville LLP, we represent securities industry employees nationwide seeking representation in employment matters.
Former UBS Banker Receives $104 Million Whistleblower Award
Bradley Birkenfeld, a former banker and employee of UBS, received a monetary award in the amount of $104 million from the Internal Revenue Service (“IRS”) for revealing information relating to UBS’s practice of advising and assisting its clients on how to shield their assets from the IRS – a clear violation of the Internal Revenue Code. Birkenfeld’s disclosure to the IRS ultimately led to a $780 million settlement between UBS and the federal government, as well as the enrollment of more than 35,000 American taxpayers in IRS amnesty programs, which will allow the repatriation of their offshore accounts. The IRS has stated that it expects to recover an estimated $5 billion as a result of Birkenfeld’s disclosure. According to a website maintained by the IRS’s Whistleblower Office, which was established as a result of the enactment of the Dodd-Frank Act in 2010, monetary awards will be provided to whistleblowers that provide specific and credible information about violations of the Internal Revenue Code. Anti-retaliation protections are also afforded to those who choose to disclaim such information. In a statement confirming the award, the IRS emphasized the importance of the whistleblower statue and acknowledged it as a “valuable tool to combat tax non-compliance.” At Lax & Neville LLP, we represent individuals, securities industry employees and securities industry companies seeking representation in employment matters and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.
LIBOR Manipulation Scandal Investigations and Litigation
In 1986, the British Bankers’ Association (“BBA”) created the London Interbank Offered Rate (“LIBOR”) to assist BBA members to set corporate loan interest rates. LIBOR is an average interest rate that determines the cost of inter-bank lending, sets the average rates banks pay to borrow from one another and is very influential in the marketplace as it establishes the benchmark for interest rates in the financial system. LIBOR is determined by the largest London/Wall Street banks submitting estimated rates. The highest and lowest four estimated rates are disregarded, and the remainder of the rates are averaged which sets the LIBOR. The LIBOR is published daily by Thomson Reuters.
Court Rules that Financial Advisors of Waddell & Reed Are Independent Contractors, Not Employees
The U.S. District Court for the Southern District of California (“U.S. District Court”) recently ruled in favor of Waddell & Reed, Inc. (“Waddell & Reed”) in a dispute resulting from Waddell & Reed’s common practice of classifying its Financial Advisors as independent contractors, rather than as firm employees. (Taylor v. Waddell & Reed, Inc., 2012 U.S. Dist. LEXIS 117258 (S.D. Cal. Aug. 20, 2012).) In December 2009, current and former Financial Advisors of Waddell & Reed, Inc. filed a class action suit against the firm and alleged that the firm’s misclassification of their employment status is in direct violation of the Fair Labor Standards Act (“FLSA”), 29 U.S.C. §§ 206-207, the California Labor Code, and California’s Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200. In making its determination to reject the Financial Advisors’ claims, the District Court referred to California’s common law test for determining worker status and considered a number of factors including, but not limited to: (1) whether the advisor’s work was done under the direction of the principal or by a specialist without supervision; (2) the skill required in the occupation; (3) the length of time for which the services were/are to be performed; (4) the method of payment; (5) whether the work is part of the regular business of the principal; and (6) whether the parties believe they are creating an employment relationship. See S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341, 256 Cal. Rptr. 543, 769 P.2d 399 (1989). As was implied in the Taylor decision, the likelihood for the formation of such a relationship is commiserate with the level of autonomy exerted by the Financial Advisors over their clientele, reported earnings, planning services, and the work location. See Taylor v. Waddell & Reed, Inc. After weighing and considering these factors as a whole, the District Court ultimately held that the terms of the employer/employee relationship as evidenced between Waddell & Reed and its Financial Advisors was representative of a true independent contractor relationship. This potentially precedent-setting case serves as a reminder to Financial Advisors throughout the country of the necessity to devise appropriate risk management strategies in order to safeguard against alternative employee classification. At Lax & Neville LLP, we represent individuals, securities industry employees and securities industry companies seeking representation in employment matters and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.